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Jim Cook



Every once in a while I switch the TV channel from Fox to CNBC to see what the liberals are saying.  After listening awhile I get a deep sense of hopelessness and foreboding for our country.  The most important thing for the left is giving money to people.  They are happy to see the growth of food stamps, disability payments, housing subsidies, free healthcare and all the other welfare benefits.  They utterly fail to see the damage it is doing to the recipients.  Whole cities that once flourished have deteriorated into rotting eyesores populated with shambling hulks of chemically dependent drones.  These people are no longer employable.  They have become incompetent and helpless and the liberals can’t see that it’s their doing.

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The Best of Jim Cook Archive

Best of Bill Buckler
December 3 , 2012
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Comparing Apples And Oranges:

Here comes that old economist's favourite phrase again. On the one hand, you have the Chairman of the Federal Reserve talking up the coming year while his colleagues fall all over themselves to reassure Wall Street that they will keep the "monetary easing" going until they have "proof" that the economy has turned around. More and more, they are basing this proof on "economic variables", the numbers churned out by government and central bank computers which claim to "measure" the health of the economy.

On the other hand, you have that same Federal Reserve coming up with a stress test using economic variables which would reduce the US overseers of monetary and fiscal policy to a state of the terminal "heebie jeebies". In the middle of all this stand what is left of the "markets". For years, Wall Street has been trained by the politicians to expect a never-ending and ever-increasing supply of "money" to invests. The Fed's part in this grand illusion is to assure us all that they can continue to provide a level playing field for the markets in perpetuity by guaranteeing that interest rates won't budge from their present levels.
2013 may be a very good year, so says Mr Bernanke. But just in case it isn't, we're going to make sure that the banks will survive no matter what happens to the economy. Mr Dennis Lockhart of the Fed bank of Atlanta is very succinct: "I expect that continued aggressive use of balance sheet monetary tools will be appropriate and justified by economic conditions for some time even if fiscal cliff issues are properly addressed". Perhaps Mr Lockhart has seen the preliminary results of the Fed's stress tests?

The Last Month Of The Year:

According to Goldman Sachs, December is one of the best months of the year for US stock markets. On data going back to 1928, December is the second best month with an average monthly increase of 1.5 percent and a 75 percent rate of positive return over the month. In December 2011, the Dow came close to that average with a rise of 1.42 percent over the month. 2011 was not a particularly good year on US stock markets with the Dow up 5.53 percent over the year. A similar performance this year would see the Dow close at 12892 on December 31. That's within 1.0 percent of the Dow's 13009 close on November 23. But be all that as it may, the biggest threat for the rest of this year and especially in the year to come does not come from the stock market. It comes from the bond market, especially the Treasury bond market.

The signal feature of the secondary market for the debt of the US government is that it is today one of the longest-lived bull markets ever recorded. Its uptrend is unbroken since the bottom more than 30 years ago in 1981. The Dow has yet to revisit the all time highs it set back in October 2007 but the Treasury market is different. In 2011, it exceeded the highs it set at the beginning of the Fed's ZIRP in December 2008. This year, it has in turn exceeded those 2011 highs. In fact, Treasuries have hit all time highs three times in 2012, the most recent instance coming only a week ago on November 16. This potential "triple top" is the most ominous formation on ANY financial market as the old years winds down and the new year approaches. It remains "THE SIGNAL" we referred to in this section of our previous issue.

For years now, the most fatuously ridiculous of the many claims made by the Federal Reserve has been the one which denies any connection between their manipulation of interest rates and the boom and bust of the housing bubble which brought on the GFC in 2007-08. Now, Mr Lockhart of the Atlanta Fed has gone one better by blandly insisting that "...there is no direct link in terms of intention between the low interest rate policy and the financing of the deficit". Any comment on this would be superfluous, so we will refrain.

The Thin Air Of The Yield Curve:

In September 2011, Mr James Kostohryz attempted to answer the question: "How low can Treasury yields go?" He summed up his answer at the outset: "As long as the US is on a fiat monetary system, there are overwhelmingly persuasive reasons to suppose that long (10-year) bond yields will never be sustained at or below 2.0%." That statement held good when Mr Kostohryz penned his article in September 2011. Over the last three months of the year, the yield on Treasury 10-year paper did dip below the 2.0 percent level, but it never remained below that level for long. But 2012, for the first time in the history of the Treasury long bond, has been a very different story. The last time that 10-year Treasury yields were ABOVE 2.0 percent was on April 25, 2012. That's exactly seven months ago. Does seven months qualify as a "sustained period"?

In his article, Mr Kostohryz pointed out that the only time that Treasury long bond yields had ever fallen to 2.0 percent was a sharp downward yield spike in 1940, shortly before the US entered WW II in 1941. Don't forget that a yield as low as 2.0 percent on a debt "asset" which does not mature for ten years is implying a stable purchasing power for the currency in which that debt is denominated for a LONG period of time. Mr Kostohryz stressed that his prediction of a 2.0 percent "floor" for the long bond yield held good - "for as long as the US is on a fiat monetary system". The history of the purchasing power of the US Dollar (and all other fiat currencies) under such a system is one of ever more violent gyrations. The history of the fiat US Dollar over the four decades of the fiat money system is one of ever DECREASING purchasing power. There were very good reasons as recently as late 2011 for assuming that the yield of the Treasury long bond had a "floor" at or about the 2.0 percent level.

Inexorably, as long as the gap between US government revenues and US government spending continues to widen - or at least not to narrow - the grossly overvalued state of the debt paper of the US government will become more and more obvious. So will the potential danger of a sudden and sharp reverse to what has become the longest intact bull market of all. The Fed knows this, that is why they are running their bank "stress tests" with parameters they would not dare introduce into any of their public economic analyses.

The Real Fiscal Cliff:

The first decade of the global fiat money era was the 1970s. That was the decade when the bear market on US Treasury debt which had begun in the wake of those 2.0 percent yields on ten-year paper accelerated downwards. The bottom was reached in 1981 when ten-year yields reached just under 16.0 percent. By 1990, the yields were between 8.00 - 9.00 percent. By 2000, they were fluctuating between 6.00 - 6.50 percent. In 2008, the year of the Lehman crisis and the onset of the Fed's ZIRP, the yields plummeted from 4.00 to 2.10 percent. That is about as low as they got on a sustained basis - until this year.

Now, the yields on Treasury 10-year paper have been below 2.0 percent on a continual basis since late April. In the seven months since then, the bull market in Treasuries has hit all time highs three times, the latest episode taking place only a week ago. This is the REAL fiscal cliff. To have any hope of maintaining the claim that 2013 might be a "very good year" for the US economy, long-term Treasury yields MUST remain at or about their present levels. The last time that the US government was wrestling with the problem of a higher "limit" for their Treasury's credit card was in July 2011. Ten- year Treasury yields stayed remarkably stable over that month at or about the 3.00 percent level. But as soon as it became clear that a deal was going to be made at the end of July, the yields began to plummet. Between July 28 and August 10, 2011, the yield on ten-year Treasury paper plummeted from 3.00 to 2.10 percent.

The chance of a repeat performance from the current yield of 1.70 percent is vanishingly small. Much more likely is the opposite scenario, the one in which the recent high on the Treasury market DOES prove to be the third prong of a "triple top". That would deliver the kind of "fiscal clarity" that Mr Bernanke does not want to EVER see the light of day.


.Ó 2009 – The Privateer

(reproduced with permission)


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